Phil Simard’s Blue Chip Investment Strategy

Phil Simard’s Blue Chip Investment Strategy

Final Rank: 318 / 518

Final Portfolio Value: $992,114,784.48 (-0.79%)

Investment Strategy For The Blue Chip Investment Contest

Since time was very limited for me in the Blue Chip Investment Challenge. I just tried to get as much profit as possible by trading SPXU and other triple leveraged ETF’s and trying to time the market. Obviously, this strategy is difficult to do without watching the market movements more closely. More judicious use of limit and stop order’s would have been needed. and are a great way to multiply earnings. I also traded (Activision Blizzard) because of strong analyst recommendations and very strong buy on Chaikin analytics. I pulled out before the profits came however because of a large drop in the market. In the end, Activision still proved to be a very good buy and I should have held it longer.

Final Open Positions and Portfolio Allocation

Blue Chip Stock HoldingsBlue Chip allocation

Performance Over The Total Contest


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See More Trading Strategies From This Contest

Phil Simard’s Blue Chip Investment Strategy - Final Rank: 318 / 518 Final Portfolio Value: $992,114,784.48 (-0.79%) Investment Strategy For The Blue Chip Investment Contest Since time was very limited for me in the Blue Chip Investment Challenge. I just tried to get as much profit as
Ross Lo Giudice’s Blue Chip Challenge Investment Strategy - Final Rank: 338 / 518 Final Portfolio Value: $979,922,717.88 (-2.01%) Investment Strategy For This Contest I don’t know if what I did even qualifies as strategy. I purchased about 20 or stocks that were familiar and then I closed my
Kevin Smith’s Blue Chip Challenge Investment Strategy - Final Rank: 331 / 518 Final Portfolio Value: $985,785,982.85 (-1.42%) Investment Strategy For This Contest This was a contest where I wanted to go big or crash hard. The news leading up to the contest was dominated by the crash
Team HTMW Blue Chip Challenge Investment Strategy - Final Rank: 336 / 518 Final Portfolio Value: $981,381,149.90 (-1.86%) Investment Strategy For This Contest We picked blue chip stocks in the Dow Jones Industrial Average, and tried to balance analyst ratings, Price/Earnings (P/E) ratios, the latest news, and our own

Advanced Chart

Advanced Chart

Using the trading view Advanced Chart software will certainly give you an edge.

Don’t forget to trade after doing your analysis!

Using the Trading View Advanced Chart

The chart is extremely intuitive but here is a quick tutorial on using it.

Advanced Chart

  1. (if you do not see the left hand panel click on the little arrow on the left hand side in the middle of the graph). Everything on the left panel is for drawing. The tools allow you to draw symbols, lines, shapes, measure distances and zoom in on a certain area. They also include a huge variety of calculated lines and arcs such as Gann and Fibonacci.
  2. This will allow you to change the symbol you are charting
  3. These tabs allow you to change the candle or tick size from 1 minute to 1 month per box or tick.
  4. This provides an incredibly large list of indicators and tools to select from.
  5. This button will allow you to add a symbol on the chart to compare too.
  6. These buttons will take a picture of the graph so you can send it to someone. The button to the right allows you to open a new window of the Trading View Advanced chart.

Fibonacci Arcs and Fibonacci Retracement

Fibonacci Arcs and Fibonacci Retracement

Technical Analysis

Fibonacci Arcs and retracements are used as a technical indicator to determine support and resistance. As with most indicators it can be used to see if a breakout has occurred or if a reversal is likely to happen.

Fibonacci Number

To understand the Fibonacci arcs and retracements, we must first understand where the Fibonacci numbers comes from. The Fibonacci numbers are found by starting with 1,1.  The next number in the sequence is found by adding the previous two numbers. To see it in action, consider this sequence of Fibonacci Numbers:


To get them, we go like this:

  • 1 = 2
  • 1= 3
  • 2 + 3 = 5
  • 3 + 5 = 8
  • 5 + 8 = 13
  • 8 + 13 = 21
  • 13 + 21 = 34
  • 21 + 34 = 55
  • 34 + 55 = 89
  • 55 + 89 = 144
  • 89 + 144 = 233
  • 144 + 233 = 377
  • 233 + 377 = 610
  • 377 + 610 = 987
  • 610 + 987 = 1597

We can use these numbers to determine ratios. As the numbers in the sequence get larger, the ratio between them converges to a constant. These ratios for the basis for the Fibonacci arcs and retracements.

By dividing a number by the number after it (ex:610/987) we will get 0.618.
By dividing the number by two after it (ex:610/1957) you get 0.382.
By dividing a number by the number before it we get 1.618.
Note:Other numbers can also be found by varying the numbers we use in the sequence.

These numbers are extremely important not just in finance, but in nature as well and can be seen nearly everywhere. (1.618 and 0.618 is termed the “Golden Ratio” because 1/1.618 = 0.618 among other things). In statistics, the percentage of a sample population found in a normal distribution in within half a standard deviation is 38.2% (which is what you get when you divide a Fibonacci number by two before it). The sheer amount of times we see these numbers in nature and elsewhere is enough to give some credit as to the use of the Fibonacci sequence.

Fibonacci Retracement

This tool, though less useful than the Fibonacci arc, can be used to determine likely support and resistance levels and can help with past chart patterns as well.
Drawing lines at the high a low, and at 38.2% 50% and 61.8% will provide important support and resistance.

As we can see below, though useful, the retracement only provides so much information and is generally less useful than drawing your own support and resistance lines.


What’s important here is that you can see is on the way down the stock went through three lines very quickly but stayed in the top and bottom tiers for quite a long time.

Fibonacci Arc

Fibonacci Arcs are far more useful as they take into account the time as well as the price.


From this graph we can see that the arc follows the 61.8% line very closely before it cuts into the next percentage area. This is very predictable since it couldn’t possibly continue to rise at the rate it was and was a support arc for that period. As with most technical indicators, Fibonacci Arcs and retracements are a tool among many others. They may provide lots of information in one graph and very little in another. What’s important to note is that it would very unlikely for the trades to go from the 100% arc to the 50% arc without some time passing by.

Stop and Limit Orders

Stop and Limit Orders


A Stop (or stop loss) order and limit order are orders that try to execute (meaning become a market order) when a certain price threshold is reached. Limit and stop orders are mirrors of each other; they have the same mechanics, but have opposite triggers.

When creating a limit or stop order, you will select a ticker symbol and quantity, just like a market order, but you will also select your “Target Price” as well. The target price is the price that triggers the limit or stop. Setting a target price does not guarantee you will get that price, it just means a market order will be created at that time. If there is not enough volume in the market to fill your order, it still may not execute.


A limit order will set the maximum price I am willing to buy(cover) at or the minimum price I am wiling to sell(short) at.


Let’s say Verizon () is at $50, but you think it is overpriced and want to buy it once it falls. By setting a limit order at a target price of $45 we can wait until the price reaches that without having to sit in front of a screen. As long as the price is greater than $45 it will not execute. As soon as the price drops to $44, your stop order becomess a market order, filling at $44.

Here is a chart showing how a “Limit Buy” order works, showing a sample stock’s price over the course of a day:

limit order


Click Here to see our full article on Limit Orders!


A stop order will set the minimum price I am willing to sell, or short a stock. It can also mean the maximum price at which I am willing to buy, or cover.



Let’s say you own PayPal stock () that you bought at $25. If the current price is $31, you want to keep holding the stock in case the value continues to rise, but you do want to protect the gains you made.

You can put a “Stop Sell” order with a target price of $30, so if the price of the stock falls to $30, you will be protected from any more losses. If the value continues to rise, you will continue to hold the stock.

Click Here to read our fill article on Stop Orders!

The table below can be an easy reminder of when a stop or limit order will execute.



Stop and limit orders will help you protect you from loss, or help you take advantage of a gain, as well as give you access to more advanced trading strategies.

One of the greatest advantages of stop and limit orders is that they can be set and left with Good Til Cancel (GTC) order expiration, and thus you don’t have to watch the stock price constantly to get well-timed trades. If prices change past your limits, the orders will execute automatically, giving you less to worry about.

This also means that you can build a much wider portfolio. If you do not need to constantly watch the price of every single one of your holdings and watchlist items because you have already set up limit and stop orders based on your preferences, you can have a much larger range of symbols on your “radar”.

Another important use is that you can take some of the emotion out of your trading. By setting limits and stop orders beforehand, you don’t have to “panic sell” or “panic buy” to take advantage of price swings; you already will have standing orders ready to spring into action when your pre-determined criteria are reached.

Click Here to read about all order types!

Trailing Orders


An order type that allows to set a moving stop or limit target price. The target price moves based on the daily high. Trailing stops can be set either in percentage or in dollars and cents terms. When in dollar terms it will activate when the price has moved by the target you have set relative to the day’s high.


Let’s say we bought a stock for 30$. The stock then climbs to 35$. We don’t think it will go much higher but we do not want to lose our profit either. We could then set a trailing stop order for 3$. This will act just like a normal stop order. Selling at your target price. Here, however, your target (moving) price is 3$ and when the price is 35$ it will trigger at just below 32$. As we will see though, it changes based on the high:

trailing stop

We’ve set our trailing stop at the second bubble. Currently our selling point is 32$. The price then goes up to 37$. The new stop order will occur at 34$ (shown by the lower red dotted line). However, the price continues to go up to 39.50$ making our stop target price 36.50$ The price moves down and then back up to 38$ but this will not affect your trailing stop since it is not higher than the previous high. Thus our stop target is still 36.50$ which will be activated at which point we fall just below it.

Similarly, we could have use a percentage trailing stop. This will act just as it did previously but the target will change based on the high price. Hence if we used a 10% trailing stop in the example above. Our exit would have been at 39.50 – 10% * 39.50 = 35.55$. Percentage trailing stops can be very useful to help protect you if your price has increased considerably. For example, a 1$ trailing stop might be fine at 10$ but wouldn’t be if your stock had increased to 100$. You would be sold out of your position far too early.

Note: There are many variations that can be made with trailing stops with advanced trading software. You can change the high’s and the duration by tick size or have different ways of calculating the target price. This is far more complex however and requires a very experienced trader.




Bonds are essentially a much more formal I.O.U (I owe you) used to borrow money. You buy the bond in return to interest over a given period of time. When a corporation or government needs money they issue bonds that people buy. In turn, the issuer (the person who sells the bond) takes the money. However, no one would buy something if they didn’t get something in return, so the issuer will offer to not only pay the person back at a specified date but also provide some interest along the way.

There are two major types of bonds:

Government Bonds

These bonds are issued by governments who want to raise cash. It can be raised by any level of government; large cities often issue bonds to fund public projects, while national governments issue bonds to fund the government. When you hear about the National Debt of a country, it usually means the amount of bonds it has currently issued.

Government bonds can be traded by normal investors, but they can also be bought and sold between countries (if you hear a news pundit mention that the US government owes money to another country, like China, it is almost always because that country purchased a very large number of government bonds), or even between different parts of the government.

In the United States, the Federal Reserve buys and sells bonds from the US treasury bonds in order to influence the prevailing interest rates, for example.

Corporate Bonds

Corporations can also sell bonds, which is essentially borrowing money from a large pool of investors. Smaller companies can usually just take loans out from a bank, but if the company is very large (like Apple (), they use more cash than banks can usually give out in one single loan. Instead, they will issue bonds to investors, with a promise to pay back at a certain date with interest.

Bonds are one of two ways that companies frequently use to raise extra cash that they use for investment and expansion; the other is by issuing stocks. However, there are very important differences between the two:

  • If you buy a bond, you are lending money to a company and they are promising to pay you back later with interest
  • If you buy a stock, you are buying a part of that company and are entitled to part of its profits (in the form of dividends).
  • The value of the bond comes from how much you lent the company and the interest rate they will pay you back
  • The value of a stock comes from how much the company itself is worth (including all its assets and business)
  • Bonds expire; at the expiration date you receive back the amount you lent
  • Stocks do not expire


Bonds can be bought and sold just like stocks, or they can be bought once and held to maturity at which point they will expire and return the face value. Essentially, when you buy a bond and hold it to maturity you will receive a certain predetermined interest rate (or coupon).

Remember that while a bond represents an amount of money that you lent to a government or company, they can still be bought or sold between investors like stocks. This means that you can buy a bond from Google (), but then later sell it to another investor who will then continue to collect the interest and receive the amount you initially lent Google when you bought the bond. Similarly, you can buy bonds from other investors rather than buying them directly from the company that issued them.

Investors typically will buy bonds when they are very “Risk Averse”, meaning they would rather have the guarenteed payment of regular interest than make “riskier” investments like stocks, whose value can rise and fall a lot over time.

Here a few terms that are important when looking at bonds:

Face Value

The face value, also known as par value or principal is the amount of money you will receive when the bond matures. This is almost always 1000$ but there can be exceptions.


This is the amount of interest you receive on your bond every year. It is usually stated in terms of the coupon rate (in percent). You then multiply your coupon rate by your face value, which in most cases will be $1000, to get your coupon. For example, if a bond is quoted at 4.00% you will receive $40 every year. Bonds can also be paid multiple times per year and are usually semi-annual (twice a year). In this case your coupon rate stays the same at 4.00% but you would receive two coupons of 20$ instead of one coupon of 40$.


The maturity is when the bond expires. If the maturity of the bond is Jan 1st 2020, you will receive your interest every year until 2020, and then on January 1st you will get back the amount you initially borrowed. After this point, the bond will no longer pay interest, and its only value is to exchange back for the amount you originally lent.


Since bonds are bought and sold between investors just like stocks, the value that they are bought and sold for on the market may not be exactly the same as the interest payments left until the bond expires and the face value. This is a very difficult concept to understand for many investors but is essentially the return you obtain when factoring the price you paid for your bond. The bond’s price is affected by the risk free rate and the bond’s own rate, as well as many other factors. The higher the Yield, the better the bond looks compared against other investments.

Accrued Interest

The interest payments on bonds are not paid daily; they are usually paid out once or twice a year (depending on the bond). However, the bond issuer owes whoever holds the bond interest for as long as they held it; if you only own a bond for a day, you are still entitled to one day of interest.

This is important for investors who buy and sell bonds a lot; if you own a bond that pays interest once per year on July 1st, but you sell it to someone else on June 15, you are entitled to most of the interest payment that they will receive from the bond issuer on July 1.

For example, lets say John bought a 5% 10 year semi-annual bond on the day it was issued and waits one year and 2 months before selling it to Kelly. This means John received two $25 coupons in the first year, and is entitled to another $8.33 from the bond issuer on top of the price he sold the bond for. This is because he held it for another two months hence 2/6 * $25 = $8.33.

Accrued Interest with Pricing

When looking at Accrued Interest, it has a huge impact on bond’s prices. Investors look at this in terms of a bonds “Dirty Price” and “Clean Price”. The Dirty Price is the price the bond trades for on the markets (if, for example, you bought a bond from another investor). This price does not subtract the accrued interest from the bond’s value. The Clean Price is the price with that accrued interest factored out.

Dirty Price = Clean Price + Accrued Interest

When you get a quote for a bond, you are almost always quoted the “Clean Price”, but when you buy it you will always pay the “Dirty Price”.


A rating is given to bonds to determine their level of riskiness. They are generally performed by third party auditing firms such as Standard and Poors, Moody’s or Fitch. Ratings system differ from company to company but it is important to know the difference between different bond ratings. The most common bond ratings are as follows:

AAA: Strongest Quality Rating, this has a very very low risk of default.
AA+ to AA-:Very high quality investment Grade.
A+ to BBB-:Medium quality investment grade.
BB+ to BB-: Low quality (non-investment grade) “junk bonds”, high risk of default.
CCC+ to C: Speculative bonds with very high risk of default.
D: Bonds in default for not paying principal and/or interest.


Nearly every balanced portfolio should have a place for bonds, if only for their strong safety while still beating inflation. Bonds can also be very risky, such as junk bonds (bonds issued by governments or companies that are very likely to not be able to pay back), that may pay high coupon rates but have a high risk of default. There are also many different types of bonds as well, such as convertible bonds that can be turned into stocks or inflation protected bonds that simply follow the rate of inflation.

Bond ETFs

You can also get exposure to bonds through bond ETF’s such as or . They have some notable differences between bonds with regards to tax considerations and returns but are much easier to trade.


Risk Level


Your “Risk Level” is how much risk you are willing to accept to get a certain level of reward; riskier stocks are both the ones that can lose the most or gain the most over time.


Understanding the level of risk you need and want is a very important part of selecting a good strategy. For nearly any strategy, whether it is picking stocks or doing asset allocation (picking how much of each type of investment we want) the steps in determining your level of risk are generally very similar. Determining the level of risk and reward needed is a key aspect of determining an investment strategy.

Determining your risk level

  • Time horizon: Your time horizon will involve when you expect to use the money you are investing.

    For example, a 25 year old who is saving for retirement can go for much riskier investments since if he loses his money in a bear market, he still has a few decades to be able to make his money back. Choosing safe investments for a 25 year old would also not be a good idea since he would be losing out on the opportunity to make a lot more money. On the other hand, someone who is retiring next year will not want to risk losing his or her money if a market collapse occurs right when they retire. They would have no time to recuperate the money and could be in serious trouble, so they will want very low risk investments.

    Hence, the longer your time horizon, the higher risk you can afford. The shorter the time horizon the lower risk you should choose.

  • liquidity: This aspect is very similar to the time horizon. Essentially someone would not choose an illiquid asset if they had needed the money for that investment in the next month. For example, real estate is considered fairly illiquid as it can take months to years to get a good price on your investment. On the other hand, popular stocks are considered very liquid as they can usually be sold anytime during market hours.
  • Investment knowledge: The higher your investment knowledge, the riskier the investments you can take. The reason being that you are more aware of the inherit risks and therefore more likely to make informed decisions. You would not expect someone with no investment knowledge to jump right into currency trading, they would most likely start off with mutual funds or bonds.

    For example, a wall street trader will not consider futures to be as risky as someone who has never even traded a stock. The trader will know how to protect himself and have a better idea of the risks involved. It is essentially the old adage “That knowledge is Power” at work, but in this case, Knowledge is Reduced Risk.

  • Risk aversion: This is a measure of how comfortable you are with risk. The opposite of risk aversion is risk seeking. The level of risk aversion is usually determined by considering different scenarios and picking the one that one feels most comfortable with.

    High risk aversion: You would prefer to invest in a stock that could have gains of 20% but has only lost 5% at most at a time.

    Moderate risk aversion: You would prefer to invest in a stock that could have gains of 70% but also loses 20% on a regular basis.

    Low risk aversion (risk seeking): You would prefer to invest in a stock that could have gains of 200% but also loses 100% on a regular basis.

  • Economic outlook: Unless you are following a very specific contrarian strategy, the worst the economic outlook is, the lower we would want our risk. On the other hand, a great economic outlook would allow us to increase our risk.
  • Savings and income: This can have a large bearing on the type of investments you will make. Someone with large amounts of savings but very little income will invest very differently from someone with a lot of income and very little savings. Again, this comes down to your individual goals. In general we would establish with our time horizon whether what our objective is. Whether we are trying to save or have income every year.
  • Tax Considerations: Tax considerations are a very complex matter given the large amount of differences in taxes between countries and even within. Tax breaks and savings should not be your main focus at the detriment of picking sound investments. However, it is very important to take advantage of tax breaks whenever possible when investing. Furthermore, there are usually differences between capital gains (for example a growth stock) and dividend gains (dividend stocks) which can make one or the other far more or less attractive than the other. Every location is different so it is important to educate yourself on the taxes associated with each asset.

To summarize, if investor XYZ wanted to know what his level of risk should be for his Investment strategy, he would go through each category and sum up his risk. For example, if XYZ needed his money in ten years, has moderate risk aversion, has very little investment knowledge and there is poor economic outlook. We could say his risk should be somewhere in between low and moderate.

The risk pyramid

Now that you’ve got a better idea of your risk level we can look at the types of investments that are right for that level of risk.


Note: You can mix a high risk asset with a low risk asset to get a similar asset of moderate risk. However, this is not always the case and is often difficult to assess exactly the level of risk, especially for high risk assets. It’s therefore much better to get a moderate risk asset if you want a moderate risk. If you are looking at this in the context of a portfolio you should also look at Asset Allocation.

Creating a Diversified Asset Allocated Portfolio

Here are a few guidelines when trying to create your portfolio:

  • Cash: Keep enough cash on hand for daily purchases and small emergencies. It can be wise to keep enough money in your bank account to avoid the fees.
  • Gold: Many investors keep a small amount of physical gold and cash on hand. This can be useful in financial crises like the great depression where limits are imposed on the amount of money that can be withdrawn. Gold is also extremely safe and not tied to a countries currency.
  • Property: Your house is an investment as it has value and should be considered as such.
  • Bonds: They are generally not good investments unless you are trying to protect what you already have. This was not always true however and is dependent on the interest rates.
  • Stocks: Diversification of stocks is important and generally the cheapest way to do is with mutual funds or exchange traded funds (ETF). Growth Stocks are generally considered to be riskier than income stocks.


Here are examples of asset classes we might assign to each investor. Note: Asset allocation is not an exact science and can have big differences between one opinion and the next.

Low Risk Portfolio: Retiree with high investment knowledge, very low income and moderate risk aversion.
Moderate Risk Portfolio: Middle aged investor with low income, high investment knowledge and moderate risk aversion with large savings.
High Risk Portfolio: Young investor with good income and high investment knowledge and low risk aversion and high spending with no owned property.




An asset is anything that has monetary value and can be sold. Assets can be anything from a pencil (though it is not worth much) to a skyscraper to things like Stocks and ETFs.

There can also be intangible assets such as the value of a brand name or logo.


Assets generally refer to either something that you intend to sell later for a profit, or something you are actively using to make money. This means that assets generally fall into two categories, Investments and Capital. The easiest way to tell them apart is this:

  • If you are using it to build something or make something (like a computer or a factory machine) that you later sell, it would be capital
  • If the value of the asset is the asset itself (like stock, bonds, or gold), it would be an investment

There are also some things that fall in the middle: For example, your house is considered an “investment” even though you are using it to live in, because hopefully it can one day be sold for a profit, with that profit being likely used for retirement.


Here is a short list of typical assets:

Cash: Cash, marketable securities, coins.
Precious Metals: Gold, silver, platinum.
Investments: Stocks, bonds, options, pensions, mutual funds.
Property: Land, commercial buildings, houses.
Machinery: Factory machines, cars, trucks, forklifts, washing machines.
Intangible assets: Trademarks, brand value.
Objects: Inventory, books, anything that has value.

Note: Typically when asset is mentioned in a financial context, it usually refers to real estate, precious metals, investments such as stocks and bonds, cash and other financial devices.

There are also many more types of asset than this

Asset Allocation

Asset Allocation


“Asset Allocation” is how you have divided up your investments across different assets. You can have all your assets in one place, or you can use diversification to spread them around to reduce risk.


Whenever you pick stocks, open a bank account, get paid, buy something, or do anything with any resources, you are doing some form of “Asset Allocation”. Early on, the choice is simply “Spend” or “Save”, how you are using your money. But like most things with investment, it is never that simple.

For example, once you have chosen to “spend” or “save” a dollar, you have another choice to make:

  • If I spend it, do I buy a video game or go out to the movies?
  • If I save, do I put it in a savings account or hold it as cash?

For us, we care mostly about savings. So if you save $1000, you can save it as cash, put it in a savings account, or invest it.

  • If you put it in a savings account, there are different kinds of savings accounts that may give you a higher interest rate, but limit how much you can withdraw.
  • If you invest it, you can divide your investment between stocks, bonds, mutual funds, or ETFs
    • If you invest in any stock, bond, mutual fund, or ETF, you will need to decide which specific ones to invest in

Of course, at every level you also have a choice of splitting your money and doing one thing with part, and something else with another. With your $1000, you can spend $300, hold $100 as cash, put $200 in a savings account, use $150 to buy Johnson and Johnson () stocks, and invest the last $250 in mutual funds. That is a lot of choices to make, even with one small block of assets!

Choosing How To Allocate Your Assets

Every time you allocate your assets, you are making many choices at once

When Spending

When you spend your assets, your main decision is Opportunity Cost. If you spend your money on one thing, you cannot spend it on another, so you need to make sure you are buying whatever it is that will give you the most benefit. You are also choosing not to save or invest, which means the benefit you get from buying something today should outweigh the benefit of having that extra investment return in the future.

When Investing

When you invest, your asset allocation will be based on 4 main criteria:

  1. Risk: Sometimes taking bigger risks can give bigger rewards, but you still have the chance of losing big too. How much risk you can tolerate will dictate a lot of your asset allocation.
  2. Liquidity: How much do you want the freedom to move your money? Assets that you can quickly convert back to cash are said to be very “liquid”, while assets that are very difficult to convert to cash (like houses) are “illiquid”. How much you value being able to move your asset allocation over time will also dictate what kinds of things you invest in
  3. How much you have: You can only buy a house if you have the ability to pay for it, and that goes with most other investments as well. If you do not have the assets necessary for a minimum investment, some options may be not open to you. This is becoming less and less of an issue with stocks, bonds, mutual funds, and ETFs, however.
  4. Opportunity Cost: This is the same as with Spending; whatever you invest in one asset is money you cannot use to buy something or invest in something else.

When you balance these four criteria, you will start coming up with your asset allocation. Just because you value one more than the others does not mean all your assets will go to one place either; a person who values liquidity the most probably will not keep all their assets as cash, both because it is risky (cash can be easily lost or stolen), but also because there is only so much cash you need at one time, so you can hold lots of cash but still keep some invested.

Asset allocation is the basis for risk management, building a portfolio, and diversification


Investment Strategy

Investment Strategy

An investment strategy is the set of rules and behaviors that you can adopt to reach your financial and investing goals. Choosing an investing strategy can be a daunting task when you are starting to learn about investments and finance. Here we will look at the larger overall strategies rather than very specific strategies.

Given that this is such a broad term there can be strategies that go from the top (Overall Portfolio Strategies) to the bottom (stock-picking strategies). You can decide on a strategy starting with an overall strategy and then select more specific strategies (top – down approach) or similarly you can look at a specific strategy and select the overall strategy that goes with (bottom – up approach).

What’s important to note is that a strategy can incorporate multiple strategies, practices and tools. Doing one strategy does not always mean that another strategy cannot be used in conjunction. What’s most important is finding your own strategy and familiarizing yourself with all the different strategies and financial tools that are available so that you can make a decision that is well suited for you.

Picking a Strategy


Given the huge number of strategies and variations within strategies we are only going to review common strategies. The level of risk for most is highly dependent on the type of investments made, rather than the strategy itself. The most popular strategy that is used by most investors that would go to a bank or an investment firm, for example, is a mix of diversification and asset allocation.

  • Random picks
  • Picking a large amount of random stocks has been found, on average, to be more successful than the vast majority of trading strategies.

  • Follow
  • Involves following whatever stock is “hot” at the time.

  • Buy and hold
  • Involves simply buying stocks and holding them for a longer period of time.

  • Day trading
  • Considered to be fairly risky trading strategy of buy and selling many times in one day to take advantage of fluctuations in the market.

  • Contrarian
  • Involves doing the opposite of the current market sentiment. Buying when everyone is selling and selling when everyone is buying.

  • Cyclic
  • Involves trying to time market ups and downs and trading accordingly, usually done with technical analysis.

  • Technical
  • Using Technical analysis to make decisions.

  • Fundamental
  • Using Fundamental analysis to make decisions.

  • Income
  • Finding assets that give income on a regular basis (such as dividends)

  • Growth
  • Finding assets that will have high potential growth but little current income.

  • Diversification
  • Choosing a large number of stocks or assets to reduce risk.

  • Asset Allocation
  • More of a guideline than a strategy, that can help with determining the correct amount of investment in each asset type.

As we’ve seen, even a buy and hold strategy can be incredibly complex depending on the specific strategy you use and the level of analysis made. What’s important is to tailor your strategy with what you are trying to accomplish. Someone who needs money right away but is risk seeking and has a great deal of knowledge may consider day trading to be a very viable option. Similarly, someone who has decades to invest and moderate risk aversion may still want to try his hand at day trading.

Passive Vs Active

Overall Strategies can also be broken up into passive and active categories:

Passive strategies are just that, passive. After making the initial decision to purchase a stock, investment, etc. the passive investor will keep it for months or years without making large changes. An example of this is someone like warren buffet who generally holds stocks for long periods of times and does not make changes to his holdings very often.

The active trader, however, will trade multiple times a week or even per day and will constantly evaluate what he is doing. Day traders are the most obvious example of an active trader.

It’s important to note that passive and active trading is over a spectrum, so someone who makes a few adjustments to their portfolio a few times a week could still be considered passive depending on the size of his portfolio for example.

Volume Weighted Average

Volume Weighted Average


Volume-Weighted Average Price (VWAP) is often used as a trading benchmark by traders, pension funds, mutual funds and market makers. It can allow traders to get a sense of how successful they were in obtaining a good price. A buy order filled below the VWAP would be considered a good trade.

Using VWAP

A lot of people will wonder why not just use the average price, it’s a lot easier to calculate and isn’t it essentially the same thing anyway? As we can see, the difference is that it tracks volume as well. By tracking volume you also get information about liquidity as well as the amount of money that traded, not just the price.


VWAP calculation can vary greatly depending on the time frame and time horizon you choose, as well as the price calculation. However, VWAP is typically used within one trading day and uses a one minute time frame.

The formula for VWAP is:


The price can be used as the last price in a time frame or the price calculated using the high, low and close in a given time frame. Here is an example of the calculations:

Volume Price Price * Vol Time VWAP 1 min
20 10.15 10.15*20 = 203 9:30 203/20=10.150
30 10.21 10.21*30 = 306.3 9:31 (203+306.3)/(20+30)=10.186
75 10.22 75*10.22 = 766.5 9:32 (203+306.3+766.5)/(20+30+75)=10.206

We can see from the calculations that the VWAP is cumulative and thus a price at the beginning with high volume will have more effect than a price at the end of the day, since it is now just a drop in all the trades placed over the day. It would take a very large volume and/or price change to change the VWAP at the end of the day (depending on the time frame you use). Another important thing to notice is the time frame, a smaller time frame (such as every trade or tick) will be more accurate, but for a stock that trades a lot this could be data for 50,000 trades. If you are doing multiple stocks, this could easily slow down or even crash your computer if you started storing and calculating enough days.


The greatest change in the results and calculation of VWAP is the time frame. If we look at the difference below between a 1 minute time frame and a two minute minute time frame we will see there is a discrepancy.


As we can see the two minute does not follow as closely as the 1 minute since it is only “checking” the price every two minutes.

Another ratio we can use similar to VWAP is the moving VWAP (MVWAP) that is similar to a simple moving average. This will use a different period and will sometimes be carried over from day to day depending on the period used. Essentially, instead of starting at one day, we will calculate our MVWAP using the data over the period we wish to study. For example, we can say we wish to take a period of 10 minutes and thus we will essentially have a VWAP that started it’s “day” ten minutes before.

Open Interest

Open Interest


Open Interest is the total number of options or futures contracts that are “open”, meaning currently owned by an investor and not yet expired.


Think first in terms of options contracts: by owning an option, it signifies that there is interest in actually trading that stock, although at a different price. Since this represents your “interest” in owning it, the “open interest” is how many shares people may be interested in trading, even if they do not actually trade.

Open interest is not to be confused with volume; it is just the total number of options or futures that are owned and not yet expired. A second definition of Open interest is the amount of open interest before the market opens, i.e. the number of open buy orders before the market officially opens, since it shares the same idea (how many shares people are thinking about trading, even though those trades have not yet happened).


Day Trading Open Interest Summary
1 Trader A buys 1 option and Trader B sells 1 option (for options and futures if there is a buyer there must always be a seller) 1 There is one option bought currently. The seller does not count in this case.
2 C buys 3, and D sells 3 4 A and C now own 4 options between them.
3 A sells 2, C sells 3, and D buys 5 2 A still has 1 sold (written), B has 1 sold, C owns 0, D has 2, if we look at the bought the open interest is 2 despite the volume being 5
4 C buys 5 and D sells 5 2 Since the options have just changed hands the open interest remains the same. The volume is 5 once again.
5 A sells 3, B buys 3, C buys 2, D sells 2 9 A now has 4 sold, B has 2, C owns 7 and D has 5 sold

As you can see these transactions can get very complicated very quickly. The usefulness is undeniable, however, as it shows just how many people “interested” in the option.


Since open interest indicates the number of “open” bought options this can give an indication of market sentiment and therefore the strength of the current trend. If there is very little open interest but a lot of volume it may be a good time to check why so many people are selling off their options.

On the other hand, a sudden jump in open interest can indicate that a rise in volatility is likely but gives little information on the direction of trend.



A pullback is a technical analysis term used frequently when a stock “pulls” back to a resistance and/or support line, usually after a breakout has occurred. Pullbacks can be in an uptrend or downtrend and can pull back upwards or downwards. In the example below we can see a pullback as it retraces back to the original trend. Pullbacks frequently become a new support or resistance line for the new trend as well. People have even created successful trading strategies centered around trading on pullbacks.


We can also see that depending on what you are using as a support or resistance line we can have a better look at pullbacks. In this case, we used a simple moving average.


From here we can see a very important aspect of pullbacks if we look at the first bubble. If we did not know any better it would simply look like it was pullback when in fact the price continued to climb and ended up breaking out. The other two bubbles are traditional downwards pullbacks.

Head and Shoulders

Head and Shoulders

The head-and-shoulders pattern is one of the most popular chart patterns in technical analysis. It’s popularity is mainly attributed to the fact that it easy easier to spot than other patterns. It’s name comes from what the pattern looks like: A head and two shoulders (and a neckline).

The pattern indicates a reversal is likely to happen after the pattern has been completed. The head and shoulders pattern comes in two forms, top and bottom. The bottom head and shoulders pattern is very similar to the double bottom pattern or triple bottom pattern and are similar in many ways.

If we look at a graphical representation of the Top Head and Shoulder Pattern we can see that the pattern is composed of two shoulders, a head, and a neckline:


The pattern does not need to look exactly like this, but it does need to follow a couple guidelines:

  1. The pattern must start with an upward trend and have a head that is higher than the two shoulders.
  2. The shoulder heights should also be roughly the same height, though the troughs can be different heights (ascending troughs are more desirable, that is to say the second trough is higher than the first trough).

In this graph, H stands for height and, in general, we can set our target price (to exit the position) roughly the same height between the difference of the neckline and the top of the head. The downward trend is likely to hit the target price of the same difference H between the neckline and the target. This is a good place to put a stop loss order.

Another thing to note is that the pullback is not necessarily always part of the pattern, it only happens about half the time. It does not have to go over the neckline, (it is even preferable that it does not) and should not be there long, or pass the neckline by a large amount. Top patterns are fairly reliable and take a downward exit (past the neckline) in approximately 90% of cases.

Here is also an example of a Bottom Head and shoulder without pullback.


This chart is almost identical to the Top and head shoulder and follows the same rules but inverted.


The underlying volume is a key indicator in successfully trading this pattern. Without volume the pattern is considered weak at best and is far more risky to trade.


Above, we can see that when the stock first crosses the line at the first bubble many would be tempted to trade the stock as it is fulfilling the pattern. That may have been very risky as it could simply have been a momentary decline without much strength. The far safer and more important time to trade is when the stock continues with it’s support and trades down with significant volume. This is a far stronger indication of trend.

To summarize, head and shoulders are one of the first patterns students learn in technical analysis. It is important to not only look at the pattern but to have a strong volume when breaking through the neckline or various supports and resistances.

Cup With Handle

A cup-and-handle chart pattern resembles a cup of coffee with a cup (half circle) and handle (downwards trading pattern). It is a bullish continuation pattern that marks a pause (sideways trend) in the bullish trend. The entire pattern can be anywhere between 1 month to a little more than year. The handle should generally by anywhere from a quarter to a little less than a half of the cup duration.

The cup should be well rounded, it can be fairly steep but should not be so abrupt that it looks like a V. It should also not be so flat that it could be mistaken for a straight line. The handle should be a fairly narrow downward or flat trend.

The cup and handle should always start with an upward trend. The height of the cup and the initial up trend are also important to have a successful cup and and handle pattern. The height of the cup should be approximately between one third (1/3) to two thirds (2/3 of the initial upward trend.

For example, if we have a stock that initial moved from 20 to 30$ and then started to create a cup, the height of that cup should be between about 3.3 (1/3 * 10) and 6.6 (2/3 * 10).


As with most technical analysis patterns, there are guidelines to indicate the strength of the trend.

1. The closer it is to a nicely rounded cup, the stronger the trent
2. The “handle” can only convert to a breakout when there is strong volume.


How to Build a Stock Portfolio

How to Build a Stock Portfolio

How to Build a Stock Portfolio

Once you have chosen your investment strategy it is time to start learning how to build a stock portfolio. Your strategies should be inline with your overall investment strategy such as whether you are day trading and the level of risk you are looking for. Although we are sticking to stocks in this article, a lot of the principles can be applied to other assets as well.

There are thousands of different way’s to choose stocks and the chosen strategy can vary widely depending on the type of strategy you wish to employ and your objectives. Since there are so many we will look at some of the more popular strategies.

Note: For most investors choosing individual stocks is not always the wisest decision and should focus more on asset allocation and diversification. On a virtual trading site, however, we have the luxury of being able trade with large of sums of money and can make trades without worrying about the losses.


No matter what strategy you use, a stock screener is an absolute must to find what stocks you are looking for. With a screener you can easily select penny stocks, or ETF’s or find out which company has had a large increase in the few weeks.


Random Picks

Picking a portfolio of 100 stocks randomly has been proven, on average, to beat the market. So if you don’t know where to start, you can just pick random stocks and still hope to get a decent return.

High Risk

A virtual exchange is a perfect location to practice high risk trading. To obtain a high risk portfolio, one would select penny stocks, triple leveraged ETF’s like oil 3X . Penny stocks are generally just that, stocks that cost a few pennies. High risk may be scary but it also has the potential for huge rewards.

Buy What You Know

The best way to start of with picking stocks is to pick a stock of a company you already know about. If they have reached you as a customer, chances are they have done something right. If you see a company that not many know about that is becoming more and more popular with your friends you can get the stock before anyone even knows about it and hope to get huge returns. Another reason this works is because brand image is a very important and if you know the brand, then the company has already succeeded in something that has a lot of value.

Word of Mouth

On the other hand, one should generally not buy a company because a friend has recommended the stock because he made lots of money. In general, this strategy works very poorly since by the time you have bought you have already lost the potential for making money. This means the news you received from your friend that the company is a buy is usually quite old and stale. The other reasons is that even if you know someone who works in finance and is at the very forefront of news for a certain company, you still have to trust that he has given you a good buy.

Fundamental Analysis

This process involves researching a companies “Fundamentals” to try and ascertain what the value of the stock should be. Fundamentals include their earnings reports, forecasts, competitiveness in it’s industry and many more. Finance students will often learn about the fundamental analysis in university and is how most analysts come up with a stock rating. Essentially, if the stock’s value is under the current price, it would be a buy and if the stock’s value is below it would be a sell. If the value was roughly the same as the current price, it would be a neutral position (or hold) meaning you shouldn’t sell if you already have it but it is not a buy either. Analysts generally have one field of expertise in an industry they know more in, as the industry they are in is important.

Price Earnings

One way to quickly look at stocks that could be worth purchasing is through P/E ratio or Price to Earnings. This gives an indication of how expensive a stock is with regards to it’s earning potential. A stock with a lower P/E ratio is generally more desirable than a stock with a high P/E ratio.

Technical Analysis

Using charts, patterns and a variety of other tools, technical traders try to predict what the market will do or determine the strength of a trend.

Trend following

A very old adage in the stock market is that “The Trend is Your Friend”. When in a bull market buy you can buy the ETF to ride the trend until you hit a bear market and then short while in a bear market. Technical analysis can be useful here as well to get a better idea of whether the market is trending upwards or downwards.

Day trading

Day traders typically use technical analysis to determine strength of a trend or predict a trend to make a profit over a few minutes to at most a day. In order to successfully day trade you will need to find stocks with higher volatility, have sufficient volume and have a low enough price to be able to invest larger quantities of money and thus be able to buy more shares.


A lot of investors like to have reliable companies with strong dividend history. By looking for high dividend yield’s and a good history of dividends, one can get a good reliable stock that will provide income every quarter or month.

Market Cap

“Too big to Fail” is the motto of this investment strategy. With this, someone would pick companies with very high market capitalization, that is to say, a very large company. This is essentially saying that the company has done well so far, why shouldn’t it in the future. These stocks tend to be “blue-chip” stocks as well.


This strategy essentially does the opposite of the market sentiment. When most people are buying, you are selling and when most are selling, you are buying.

Warren Buffet

One of the greatest investors of all time uses a variety of the strategies we’ve seen above but can be summed up pretty easily. Warren Buffet essentially buys great companies at a good price. Some of the ways he chooses an investment are as follows:

  1. Competitive Advantage – A company has to have a great competitive advantage over the competition. This could be anything from a patent to economies of scale.
  2. Brand – A good brand provides a huge competitive advantage, especially for simple every day things like ketchup and toothpaste.
  3. Reasonable Price – A great company isn’t a great company if it is very expensive right now. Warren buffet has said that what a company costs is the price, but what you get is the value.
  4. Proven – A company has to have a long and stable track record of earnings before he will invest in them.

Warren Buffet’s approach is therefore close to someone using fundamental analysis but throwing out anything that isn’t a good company with a great brand.

Follow an Investment Strategy

Follow an Investment Strategy

The key to investment success and learning about the stock market is to follow an Investment Strategy. Not picking a strategy is far more damaging than picking a bad strategy. Even with a bad strategy, you can usually outperform not having a strategy, and at least you will learn about that strategy. It’s incredibly easy to pick a strategy since even picking random stocks can be considered a strategy worth trying!

Here’s an overview of some great strategies and articles we’ve posted:


The best part is that you can practice all these strategies without losing a penny on the HowTheMarketWorks stock market game!

Economies of Scale

Economies of Scale


Decreasing the long-run average and marginal costs that come from an increase in the size of a factory or plant. Economies of scale can be from the inner workings of an organization. This could include the lower cost from adding technology and better organization.

Details on Economies of Scale

In simpler terms economies of scale is a decrease in your costs thanks to being bigger.

Take, for example, two car manufacturers. The first has a very small shop, with five employees. He only sells five cars a year so he can only invest 1,000$ each year to hire employees, robots and other ways of building his cars faster. The employees will have to be able to do a lot of different things. They also won’t be able to buy robotics. Another big problem is that they won’t have enough room to work on cars all at the same time, they may get in each others way or have to wait for the person before him to finish.

On the other hand, the second car producer sell thousands of cars and can invest millions each year. Unlike the small car producer he can have specialized workers do a task one after the other and very quickly. He can also buy specialized robots that can do the job much faster than any human. He can do this because his scale or size is bigger, he cant afford to invest in bigger and better machines because he already makes so much money producing lots of cars.

One of the greatest examples of economies of scale is Ford , he was a pioneer in this and was able to achieve great success by having people do one thing really well.

Bigger is not always better

There is a point in economies of scale, however, where things will actually get less efficient and more expensive. An example of this is hiring so many workers that they just step over each other, or have too little to do. That’s why companies strive to keep themselves in a happy middle and have the lowest costs possible.

Day Trading Rules

Day Trading Rules

Day Trade: Buying and Selling (or Shorting and Covering) the same security on the same day.

How often can I day trade?

There are various laws and regulations with regards to day trading depending on the country you live in. It is important that if you do decide to start day trading in your personal brokerage account that you are aware of the day trading rules of your respective country. Most countries have rules on margin accounts and not necessarily on trading accounts without margin but it is always important to verify.


The SEC governs the rules and you should thoroughly read the SEC’s day trading rules and regulations, as well as FINRA’s guidelines. Essentially, if you are in the US and make four or more trades in a 5 day period you may be flagged as a “Pattern day trader” and could lose your margin account status unless you fulfill certain rules. This only applies to small accounts; if you hold more than $25,000 in assets in your margin brokerage account, you are probably exempt from this criteria.

Stock Market Games:

Other the hand, the rules for paper trading software such as HowTheMarketWorks are far simpler. If day trading is allowed you are able to trade as often as you’d like.

Read Option Tables

Read Option Tables

Options are an important instrument for many traders, and to understand options you need to understand options tables and learn how to read option tables!

Depending on the software or website you use, the actual information may vary, but all tables have these basic sets of information:

Calls Puts Strike Vol Expiry Last Chg Bid Ask Open Int Symbol

Calls: This will show whether the option being looked at it is a call (gives the option to buy at a future date)

Puts: This will show whether the option being looked at is a put (gives the option to sell at a future date)

Strike: The strike price is the price at which we can exercise the option. For example, a call option with a strike price of 50 will allow to buy the stock at $50 instead of the current price.

Vol: The Volume works the same as stocks. It is the amount of option contracts that have been traded (Note: options contracts are always for the 100 options! So when you buy 1 option contract you are actually buying 100 options to call or put the underlying stock!)

Expiry: This is the month, day, and year that the option expires. At option expiry you will either get the your profit if you are “in the money” or your options will be worthless if you are “out of the money”.

Last: The last traded price, just like with stocks.

Chg: The change in price from the open to the last price, just like with stocks.

Bid: The price you get when you buy an option.

Ask: The price you get when you sell an option.

Open Int: This indicates the open interest or number of outstanding options contracts.

Symbol: There are many different ways that option symbols are shown, but the symbol is based on the underlying stock, the strike price, and the expiration date. Here is one of the more used symbols:


To understand what this symbol is telling us, we need to break it into parts:


These are what each part means:

GE: This is the symbol of the underlying stock
150821: This is the expiration date: “15” as the year, “08” as the month, and “21” as the day. Now we know this option expires on August 21, 2015
C: This tells us whether this is a “Call” or “Put” option. C stands for Call, P for Put
00018000: The last part is the Strike Price. The rightmost 3 digest are the decimal values (all options go down to tenths of cents, so there are 3 decimal places shown), so we know that this option’s strike price is $18.

Put it all together, and we know this is the symbol for a GE Call stock that expires on August 21, 2015, with a strike price of $18. Similarly, MFST170123P00008275: Would be a Microsoft 2017 January 23rd expiry Put with a strike price of 8.275$.